The 2023 Capacity Market launched last week - and the prequalification window officially opened on Wednesday 26th July. These Capacity Market auctions are for delivery in the following Capacity Market years (i.e. online by the winter of):
- T-1: 2024/25.
- T-4: 2027/28.
National Grid ESO has published its recommended capacities for procurement (in both the T-1 and T-4 auctions); its final de-rating factors for each technology; and the timelines for the auctions.
A record amount of T-1 capacity
This year’s T-1 auction is the biggest ever - with the highest target capacity yet. This is largely a contingency plan in case of non-delivery - up to 3.9 GW of under-delivery is considered possible, which means that the Capacity Market needs to ensure that this is compensated for.
- The ESO has set a recommended target of 7.4 GW for procurement in the T-1. (Last year, that target was 5.8 GW.)
- This is good news for battery energy storage assets coming online early, and/or without an existing T-4 contract.
- In the T-4 auction, the recommended target was 44.5 GW. However, 1.5 GW of this is being set aside for the T-1 auction, meaning the final T-4 target is 43 GW. (Last year, it was 43.9 GW.)
Storage de-rating factors take a big hit
In this year’s auctions, storage de-rating factors - the capacity that storage assets are valued at, according to their duration - have been reduced significantly.
- De-rating factors in both the T-1 and T-4 auctions are down by roughly a third from last year.
- This reduces the real-terms Capacity Market revenues available to battery energy storage assets. (Each MW is worth a third less than it was last year.)
This reduction in de-rating factors for storage is part of an ongoing trend.
Why are storage de-rating factors falling in the Capacity Market?
One of the big reasons for this reduction is the number of storage assets that already have Capacity Market contracts. More shorter-duration storage (which can only provide capacity for a limited amount of time) means that stress events become longer - which, in turn, further reduces the benefit of having additional shorter-duration storage.
Basically, if more shorter-duration assets win Capacity Market contracts - which could, in theory, otherwise be awarded to longer-duration assets - there are fewer longer-duration assets to respond to stress events. Subsequently, these stress events last longer. It takes more time to put out a fire with lots of small buckets than it does with a hose.
All of this means that the duration of storage projected to cover >95% of stress events has risen to eight hours. Therefore, any storage assets with less than an eight-hour duration are now considered ‘Duration Limited’.
However, the methodology for deciding storage de-rating factors is currently under review - the initial consultation will happen this Autumn. That said, any changes made will be too late for this year’s Capacity Market.
Other de-rating factors have changed, too
- These changes to the assumed duration needed to tackle stress events mean that solar has been given a higher load factor - because it is expected to deliver more during this window. As a result, de-rating factors for solar have increased by 1.4 percentage points.
- Elsewhere interconnectors have generally seen a haircut in de-rating factors - most significantly for France.
- And there aren’t many many changes for traditional generation - although Demand-Side Response has seen a small increase.
Prequalification closes in September... and auctions will take place at the end of February
Here are the key dates for the 2023 Capacity Market:
- Prequalification closes on the 19th September.
- The T-1 auction will take place on the 20th-21st February.
- The T-4 auction will take place on the 27th-28th February.
What will happen in the 2023 Capacity Market auctions?
- The huge capacity up for grabs in the T-1 means we will likely continue to see very high prices in this market (£60/kW this year).
- The T-4 likely has a much wider range of possible outcomes - with site retirements and new-build gas again likely to prove key in setting the price.
- Reductions in de-rating factors for storage mean that the Capacity Market has even less of an impact on battery energy storage revenues.
- Despite this, the ongoing battery energy storage boom means that batteries remain one of the highest providers of new capacity bidding into the auctions. The lower de-rating factors mean that auctions are likely to clear at a higher price to compensate.